They Missed the Money

The Federal Crisis Inquiry Commission (FCIC) had as much chance of satisfying
the public as the Warren Commission did of closing the debate on the Kennedy
assassination. The FCIC published its report on January 27, 2011. This was
the "Final Report of the National Commission on the Causes of the Financial
and Economic Crisis in the United States." The FCIC itself could not come to
a conclusion. The Democrats wrote for the majority, the Republicans for the
minority, and a think-tank fellow motored off on a tangent of his own.

By the way, these conclusions, cleaved by the politics of the season, demonstrate
the immaturity of Washington. It does not represent. The members could not
forsake their hobbyhorses to address the time bomb that, unaddressed, will
explode. A half-century's accumulation of bad debt tumbled over in 2008 and
a much larger mountain of waste and ruin lies ahead.

My gripe: the FCIC found the greatest fault with the effects rather than the
cause. This is true of all three conclusions. The cause of the crisis was too
much money and credit. An economy needs enough credit to operate but not so
much that speculation runs the country. (This, of course, is so obvious that
it might seem a waste to write, but the so-called policymakers rev the cyclotron
faster and faster.)

Among the "Conclusions" of the Financial Crisis Inquiry Commission Report, the
majority averred: "[I]t is the Commission's conclusion that excess liquidity
did not need to cause the crisis. It was the failures outlined above - including
the failures to rein in the excesses in the mortgage and financial markets
- that were the principal cause of the crisis."

The Federal Reserve is Cause, Not Effect, for Abuses in Subprime Lending

There would have been no lending of any sort without the Federal Reserve.
The Fed prints the money that enters the economy. It has a monopoly. Counterfeiters
know that.

Credit springs from money. The commercial banking system produces credit,
by and large. The Federal Reserve sets reserve requirements on commercial
bank credit growth. If the Fed sets the bank reserve ratio at 10:1, a bank
cannot lend more than $10 for every $1 on deposit. That effectively limits
the growth of credit.

The Federal Reserve has the authority to increase or decrease bank reserve
requirements at any time. During Alan Greenspan's chairmanship, the Fed
reduced bank reserve requirements several ways; it never increased them.
The result of the Greenspan Fed's money and credit expansion: commercial
banks, having run out of proper projects to fund, lent to investment banks,
hedge funds, private-equity funds, subprime mortgage lenders, and commercial
property speculators. (An investment bank may have lent to a non-bank mortgage
company, but it first had to borrow from the commercial banking system.)

The Federal Reserve, under Alan Greenspan, both printed every dollar
that entered the economy and had sole authority to set bank reserve requirements.
If the Fed had reduced reserve requirements, this would have restricted
the lending that proved so destructive.

There is, of course, much more than I have written above for a full understanding
of money and credit, but Alan Greenspan will not attempt to enlighten the
commission....

Greenspan's testimony was indeed reprehensible, but let him rust.

In 2011, Federal Reserve Chairman Ben S. Bernanke is the cause of various
asset-price inflations. He is increasing money at a rate far beyond Alan Greenspan's
worst excesses. The overinvestment (also called "liquidity" or "speculation")
has destroyed potential returns of promising enterprises. To distill the current
investment environment: "I have a better chance of a triple buying Chinese
dot.coms than investing in a profitable solution to world hunger, and the Fed's
rigged the markets, so I'm making money fast before everyone realizes Vegas
is a squarer deal."

Sheehan serves as an advisor to investment firms and endowments. He is the
former Director of Asset Allocation Services at John Hancock Financial Services
where he set investment policy and asset allocation for institutional pension
plans. For more than a decade, Sheehan wrote the monthly "Market Outlook" and
quarterly "Market Review" for John Hancock clients.

Sheehan earned an MBA from Columbia Business School and a BS from the U.S.
Naval Academy. He is a Chartered Financial Analyst.